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On Sunday, August 15, 1971, Richard Nixon unilaterally brought to an end the last trace of an experiment in international monetary affairs that stretched back over a century. He announced that the United States government would no longer abide by the 1944 Bretton Woods agreement to deliver gold at $35 per ounce to any government or central bank.
What he abolished was not a gold standard. It was a government promise standard. There was never a gold standard in the nineteenth century or early twentieth century. It was always a government promise standard. It was as reliable as government promises.
Governments always announce and defend by monopolistic violence their legal sovereignty over money. They say that they will control the terms of exchange. All monetary standards are based on government promises and IOUs called government bonds. These contracts are always broken by governments. The only major exception in history was Byzantium for about 800 years, beginning in the early fourth century under the emperor Constantine.
What Nixon destroyed was called the gold-exchange standard. It was first adopted by governments at the Genoa Conference of 1922. It was an agreement to avoid returning to the pre-World War I gold coin standard, which had been independently but almost simultaneously revoked by European governments when war broke out in August. They all then resorted to monetary inflation. This was a way to conceal from the public the true costs of the war. They imposed an inflation tax, and could then blame any price hikes on unpatriotic price gouging. This rested on widespread ignorance regarding economic cause and effects regarding monetary inflation and price inflation. They could not have done this if citizens had possessed the pre-war right to demand payment in gold coins at a fixed rate. They would have made a run on the banks. Governments could not have inflated without reneging on their promises to redeem their currencies for gold coins. So, they reneged while they still had the gold. Better early contract-breaking than late, they concluded.
The central banks collected the gold held by commercial banks for their depositors. Then the governments legalized this breaking of the contracts by commercial banks with depositors. It was a sweet deal for commercial banks, central banks, and governments. A country music song seven decades later summarized the economics of the arrangement from the depositors’ point of view: “She got the gold mine. I got the shaft.”
What was the gold exchange standard? It was a post-war attempt by governments to retain central bank autonomy, but still keep monetary inflation under control. Germany, Austria, and Hungary had all adopted policies of hyperinflation which would go on until the end of 1923. The governments adopted a pseudo gold standard. It allowed central banks to buy the IOUs of Great Britain and the United States and be paid interest. These IOUs functioned as if they were as good as gold. Great Britain and the United States guaranteed to deliver gold bullion at fixed rates. They maintained convertibility to central banks. The other central banks did not promise convertibility with their citizens. So, they could issue IOUs to their own domestic investors without fear of a gold run by citizens. Only central banks were allowed to make a run on banks, namely, the Bank of England and the Federal Reserve.
The reduced the chance of gold runs. Only Americans could make bank runs on gold in the form of demanding gold coins at a fixed price of $20. England re-established convertibility in gold bullion only in 1925. This kept citizens from demanding gold coins. It reneged on this in 1931. Then Roosevelt in 1933 reneged. He forbade gold ownership by American citizens and residents of the United States. Then in 1934 he hiked gold’s price from $20 to $35. He let central banks and governments make runs on gold bullion held by the U.S. government. Nixon ended the arrangement in 1971.
From 1914 until 1971, we see a trail of broken contracts by governments with their citizens and then with each other. Each step expanded the ability of central governments to impose the inflation tax on its citizens and on any foreign investors holding government IOUs. No government or central bank deliberately shrank the money supply after 1914. Bank failures, 1930-33, shrank domestic money supplies, but this was not central bank policy anywhere.
The gold standard was always a government promise standard. Governments broke their promises as a matter of policy after August 1914.
The governments want autonomy. This means autonomy from their citizens. Citizens exercised control in two ways before 1914: voting (limited franchise) and gold coin ownership (wide franchise). They were allowed by law to turn in domestic money and receive gold coins at a fixed price per ounce. This was tolerated by governments until World War I broke out. Then, invoking patriotism, they reneged. Having removed the power of monetary redemption from the broad mass of residents — not always eligible for the franchise — politicians never restored this power to the public. Governments enforce autonomy over money because they want autonomy from the public.
The voting public never has figured this out. Voters do not demand that governments cease exercising monetary sovereignty. Neither do political theorists. Neither do most economists. Only Austrian School economists demand this. They are a tiny minority.
Voters ever since World War I have tolerated a series of broken promises by governments regarding convertibility into gold coins at a fixed, government-guaranteed price. The governments have steadily removed any power of citizens to impose limits on the central banks’ ability to increase the money supply. Today, the only people who have prevented Federal Reserve inflation in 2008 and 2011 from becoming hyperinflation are commercial bankers, who have increased their holdings of excess reserves at the Federal Reserve. The public has no voice in this matter.
A FREE MARKET GOLD STANDARD
A free market gold standard should be the result of two legal arrangements: (1) open entry into the money business, (2) the enforcement of contracts. Gold would become one common currency. So would silver, if history is a guide. The government would get out of the money business altogether. It would claim no unique authority over money. It would decide the monetary unit in which to collect taxes — nothing more. It would enforce contracts, meaning lawful voluntary exchanges in which no fraud is involved.
This would decentralize and privatize money creation. It would also privatize and decentralize the fraud of counterfeiting. It would pit bankers against bankers, who would participate in bank runs against suspected banks. It would decentralize the enforcement against fraud.
By removing monetary sovereignty from governments, this arrangement would permanently keep fraud from becoming centralized and a matter of law. It would keep the fox of government away from the chicken coop of money creation. It would make impossible any replay of the string of broken contracts, 1914 to 1971, which marked the government promises standard which masqueraded as a gold coin standard, then a gold exchange standard, then a Tricky Dick Nixon standard.
Whenever anyone proposes a monetary reform that involves government control over money, keep this picture in mind:
August 15, 2011
Copyright © 2011 Gary North